It’s hard to remember an origination market as competitive and challenging as the one we have today. Everybody is rightly concerned with rising loan costs and the increasing risk of compliance and making mistakes. And because the housing market is not exactly on fire, every loan counts.
Almost daily, we receive emails from clients and non-clients asking us how they can save money originating loans. Many are experiencing sharp fluctuations in demand due to higher rates and view outsourcing as a possible panacea for managing costs.
On the other hand, outsourcing is not for everybody. Here are three things your outsourcing strategy needs—and a few challenges you’ll want to avoid:
1. Variable Costs. There’s no bigger challenge to originators than controlling costs. A lender that does its own origination, processing and fulfillment is likely to be overstaffed or understaffed at some point in time. By outsourcing one or more pieces of the origination process, a lender doesn’t have to worry about this problem.
However, beware! In order to truly be able to control costs, a lender should only pay for the services they receive, and not every outsourcer offers a variable cost structure. This is something to keep an eye on.
Another challenge is that some lenders will make the mistake of outsourcing more origination services than necessary and later determine they want to take certain tasks back in-house. This can also affect costs, so the decision to outsource should always be given careful consideration.
2. Scalability. Traditionally, lenders dealt with large swings in volume by hiring or firing staff. But these are not easy nor inexpensive decisions to make. Adding processors, underwriters and other employees is time consuming for any business, not to mention the impact new hires have on HR and administrative costs.
Outsourcing part or all of a lender’s origination and fulfillment activities eliminates this problem. When origination servicers are accessed only on an as-needed basis, lenders can react to shifts in volume much more quickly and nimbly.
3. Compliance. Another benefit to outsourcing is being able to ensure your business is compliant with changing regulations. For many small and mid-sized lenders, compliance is a huge concern because they just don’t have the expertise or staff to handle constantly shifting regulations and requirements.
However, outsourcing for better compliance only works if you choose the right partner. Outsourcing origination support services with a trusted third party that is up to speed on these rules and requirements—in addition to the lender’s own unique business rules—can eliminate this burden, at least for work being outsourced.
Keep in mind that loan origination, processing and fulfillment is no piece of cake for anybody, including third-party outsourcers. That’s why it’s so critical to look for a partner with the experience in all facets of loan production and one that has a strong track record of results. If you’re looking for such a partner, you’ll want to ask for references and make sure that they are capable of providing the level of service and controls that you and your investors require.
I expect we’ll continue to see tighter competition among originators and increasing demands for cost efficiency throughout 2018. If you’re starting to think about outsourcing origination support, or you’re already outsourcing but need more bang for the buck, I’d be happy to talk with you about it. You can reach me at info@TheStoneHillGroup.com.
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