With just seven months to go before the implementation of the Mortgage Credit Directive, time is running out for those in the second charge market to get the correct systems and processes in place to meet FCA standards. With the clock ticking and brokers keen to find efficient and effective ways to incorporate secured loans into their sales process technology is taking centre stage.
In recent weeks Mortgage Brain, the firm behind the sourcing system widely used in the first charge market has announced changes and ‘enhancements’ to its products, including the development of a tool for sourcing secured loans. Meanwhile earlier this year technology firm Twenty7Tech launched LoanSource, a system which allows brokers to source second charge and bridging loans alongside mainstream mortgage products.
For brokers who have been in the industry for a while, it’s an interesting time. Technology has not traditionally been used in the second charge sector to the extent it has in the first and indeed investment in that area has been scarce.
“Up until a few years ago, there was a massive drop in the need or appetite for second charge lending, so it is no surprise that lenders and distributors held off any investment in technology” says Tony Salentino, director, Complete FS. “As the market is growing the industry appears to be investing more in technology. This has been further evidenced by recent announcements in the press from Complete FS and Brightstar who have linked up with provider, Twenty7Tec to offer a combined Mortgage and Secured Loan sourcing facility and Y3S who have enhanced their MI loan software as well as lenders advancing their online functionality.”
Bradley Moore, director of second charge at Brightstar agrees.
“I don’t think second charge lenders and brokers were keen to invest heavily in technology at a time when there wasn’t a lot of momentum, especially during the credit crisis,” he says.
“The word has spread around second charge and the interest and volume has increased, the confidence to invest has also increased.”
Appetite is certainly increasing. According to figures from Loan Warehouse second charge lending in 2014 was up 28.75% on 2013. However, those looking to create or enhance systems for this buoyant market would do well to bear in mind the differences involved in both the sourcing of and the underwriting of second charge loans.
“Second charge business has always tended to be about understanding the deal as a whole and therefore human interaction has always been paramount,” explains Jon Sturgess, head of sales, secured lending, Masthaven Secured Loans. “There are a number of new entrants in the sourcing field now offering some solid technology to help brokers. However, they will not replace the expertise of the human underwriter. What they do is to act as a superior filter for brokers looking to get to the most likely lenders to talk to.”
The need for a more bespoke underwriting service may well have deterred some technology providers from entering the industry. A simple sourcing system may work in the mainstream market but it’s not the right approach to take when secured lending is involved. According to
Steve Walker, creator of Loan Brain, a free sourcing and compliance system, and managing director at master broker Promise Solutions such systems already exist in the secured sector and some are more advanced than their first charge counterparts because of this.
“In areas such as integration into CRM systems and providing add on features (such as ESIS or KFI) the second charge market is some way behind the mortgage market.” he says.
“However, in terms of the technical ability of sourcing and underwriting loans, I think it is actually ahead of it. We have underwriting systems rather than simple sourcing systems and packaging expertise adds greater accuracy and opportunities to identify referrals. Sourcing systems in the mortgage market don’t do the same amount of calculations behind scenes to make sure the case meets lender criteria”.
The differences between the two sectors and the way in which brokers go about sourcing loans are of particular significance at present. With the second charge market now under the FCA’s remit – and the whole industry soon to be subject to EU regulation – brokers should start viewing second and first charges in the same way and as such an integrated sales process will be essential. Furthermore, the need to document this sales process and show both products have at least been considered will be more important than ever.
It is here where good technology will really prove its worth.
“Compliance departments and the regulator are going to be very keen on looking at files which clearly demonstrate the roadmap of a case from enquiry to completion and technology will be at the heart of that,” says Sturgess.
It’s an opinion that is widely shared. Complete’s Salentino says the need to evidence the research undertaken by the adviser will be imperative and in particular the requirement for transparency in relation to a client’s costs will require support and accuracy, which can be delivered more effectively with technology enhancements. Meanwhile Brightstar’s Moore calls technology “fundamental to the entire process to be able to satisfy the clients’ requirements as well as the regulators.”
But it’s not just in the evidencing of a sale and providing an audit trail that technology can be beneficial. The right systems can also improve a brokers productivity and efficiency, allowing him to offer a better service for clients.
“Technology provides brokers with very fast quotes so they are able to see what’s available,” explains Walker . “For the most part brokers want to know whether secured loans are a viable option so that they can quickly discount them if not. The systems available in the market already do this, though some better than others.
“Once a broker has decided that a secured loan is a suitable option they’ll need hard evidence of what’s available to demonstrate the best outcome. A good system will do this as well, not just comparing on rate but on lots of different factors across fixed, variable and tracker products. It’ll consider the impact of early repayment charges and lender fees and illustrate quickly the differences between the choices. It allows for a holistic advice process. Without it brokers would be in the dark.”
What will be key, going forward, says Walker is that systems reach a point in development whereby brokers can identify the best loan and the best mortgage side by side.
“The difficulty is if this is done simplistically you’re not getting an accurate comparison,” he adds. “It’s tick box underwriting versus proper underwriting and that can’t be good for the consumer.”
With technology developing rapidly and providers regularly enhancing their systems, what do the industry’s key players want to see next?
Jon Sturgess, head of sales, secured lending, Masthaven Secured Loans, said: “The Holy Grail for everyone in the lending industry is to be able to perfect a technology driven solution, which encompasses every part of the process and the whole market. However, there are so many competing facilities as well as the struggle for example, where some lenders struggle with antique legacy systems which are resistant to interfacing with other newer software. We will get there, but the platform has not been built yet that can honestly be said to be universally accepted and all encompassing.”
Tony Salentino, director, Complete FS, said: “In general terms most sourcing systems act as a guide and are an aid to support the research the adviser undertakes. These should not replace the need to speak with the lender to further confirm suitability for the client and eligibility. However, I would like to see lenders and sourcing systems taking more responsibility for the information they transmit as many brokers get frustrated when there are inaccuracies. In addition, interfacing DIP’s and full applications by data capturing and prepopulating clients’ information can still be a bit clunky and often is duplicated or re-entered.”
Bradley Moore, director of second charge loans, Brightstar, said: “Down the line, perhaps we will see some further integration across the market with the credit reference agencies, land registry as well as surveyors’ systems, even perhaps broker and lender integration, all will serve to provide a better customer journey.”