The widespread use of manual underwriting in the second charge mortgage market has historically been used as a selling point but given the increasing number of products available, is the manual approach still a realistic option for brokers?

Second charge firms have always offered the personal touch when it comes to processing a loan and this approach has often worked well. Yet with hundreds of different rates and loans on offer, can brokers still do the math themselves and claim to be offering customers the best advice?

The Personal Touch

Simon Carr, director of second charges at Precise Mortgages, says he fails to see how brokers will survive without the use of appropriate technology.

“People will argue they have coped for years and will continue to do so, but I fundamentally disagree,” he says.

“More lenders entering the market with an ever increasing number of plans will inevitably lead to brokers having to consider all lenders and all plans to make sure the offer is the correct one.

“Without a system to underwrite the deal, brokers will have to calculate repayments across several lenders to make sure the best/cheapest is offered,” he adds.

Steve Walker, managing director of Promise Solutions, estimates that around 75% of second charge brokers are still underwriting and comparing loans in a manual way because they either don’t want to use technology or don’t want to invest in it.

He says: “Firms should be using technology to identify which product is best for the customer. In my view, a broker can’t manually compare 500 loan products from 20 different lenders and assess which of those is the most appropriate for a client.”

Technology does not just play a part when comparing products, Carr says that the slicker a broker’s back office is, the more time they have to focus on new business.

“If a broker still manually packages a deal and on every case types in the same or similar notes, diary dates and needs (application form, credit agreement, two payslips, one years’ accounts, valuation, mortgage reference and details of credit to clear) and carries out the same actions, then they are less efficient and spend their time in the world of admin and more often than not find themselves playing catch up,” he says.

“There are some very clever CRM system / processing systems that take away a lot of the mundane work involved in packaging a case,” he adds.

Regulation

Brokers that are unwilling to turn to technology may have no choice under the new regulator – the Financial Conduct Authority.

Richard Pike, sales and marketing director at Phoebus, says the FCA will require evidence via clear audit trails and proof that every second charge sale has been made compliantly.

He says: “The secured loan originations market has generally been more manual than the first charge market which leaves more room for error.

“Manual errors will carry a much higher risk of sanctions in a regulatory regime, so it makes sense for companies to put in compliant technology which can provide full audit trails around documentation and the sales process, integrated with document management and even telephony.”

The new regulations also mean that brokers will have to take more factors into consideration when advising on the best product and carry out a full affordability assessment on the borrower, looking at more than just their income.

Walker says: “As the sector moves towards being advised, technology will become even more important because brokers will have to look at things such as what kind of rate the borrower should be on, and for how long. At the moment some brokers are trying to get away with going for the cheapest rate on a non-advised basis.”

Walker however does not believe regulation in itself should be the catalyst that drives firms towards technology but rather firms should be investing in it because it is the right thing for the client.

“Technology is a vital part of what we do right now, providing it is good,” he says. “Poor technology or something that does half a job can get brokers into more trouble than no technology at all.

“If a system just shows the loan with the lowest repayments, this may not be the most appropriate deal for the client. The borrower might need to know what the lowest cost is over the term or which loan has the lowest fees or ERCs, or the ability to overpay without penalties,” he says.

Investing in technology now may eventually save firms money in the long-term as it will make it easier to identify why each loan was sold in the event of any complaint being made.

Carr says: “Technology affords you the ability to remember why you decided on lender A over lender B, several years later.

This has to be a benefit and allows your decision/ recommendation to be defendable.

“A customer may request a three-year fixed rate deal with low set up costs and low exit fees with the intention of redeeming the loan in four years’ time. But tell me who can quickly compare the second charge market – I believe 20 currently active lenders – then filter the loans by term, entry and exit costs together with final loan repayment and APR – it’s a lot to consider.

“Now fast forward four years and then try to remember why you recommended what you did,” he says.
Carr says the correct system can add efficiency, accuracy, scalability, stability and a compliance safety blanket for firms.

Finding the Right Balance

One area of the sector that some would argue is more prone to the manual approach than others is the non-mainstream sector.

Carr however says it is a misconception that complex cases need to be manually underwritten.

He says: “I hear the comment ‘it’s not mainstream so it has to be manually underwritten’ time and time again and many use manual underwriting as a killer unique selling point.

“My background has been brokering loans for over 20 years and I always held the belief that the rules, when broken down, could be handled by an underwriting system.  I believe this to be the case today and many brokers have developed systems that do just that.”

Does this however mean that manual underwriting no longer has a place in the seconds market?

Barney Drake, operations director at Y3S, believes that while technology should play a central role in the industry, the manual approach is still needed.

He says technology should be used to demonstrate to the customer the pros and cons of one particular loan over another or a remortgage.

“Technology that clearly displays this to the customer in an unbiased format enables them to make such an informed decision and it is the duty of our industry to ensure this is achieved,” he says.

“While systems are vital, so is also a healthy blend of human interaction to provide that all-essential common sense view. If the industry becomes vastly system-driven, this will drastically change the ethos of our industry – providing common sense lending to those recovering from the after-effects of the worst economic crash of all time.”

He adds: “We must be mindful that human interaction is essential. Systems should be a supportive component but not relied upon in my opinion.”

For those firms in the seconds industry that have used the manual approach for most of their working lives, switching to using a more technology-led style may not seem appealing. The initial costs however of implementing the correct systems should pay off. The number of second charge products look set to only grow – as does the regulator’s hold on the sector. It is no longer enough for a broker to choose the product with the cheapest rate for a borrower, instead brokers need to offer a more holistic form of advice under the new regulations – something which the right technology can help with.