Lenders Respond to Credit Market Woes

NEEDHAM, Mass. — After surveying various lenders, TowerGroup reported that the biggest concern right now of financial service institutions is market volatility, as many lenders are watching the subprime mortgage market to see how the recent downturn plays out and whether it impacts other markets.

Regulatory compliance comes in as the second biggest concern by lenders questioned, according to TowerGroup.

In order to combat the recent issues facing the lending market, financial institutions said innovation in products, services and channels is their No. 1 strategy, with business process automation coming in a close second.

Moreover, 64 percent of companies questioned planned to spend more than $100 million on technology, with 18 percent indicating they plan to spend $1.5 to $5 billion on these initiatives.

Bobbie Britting, senior analyst of consumer lender, reported that the mortgage market in the U.S. is in a "time of extreme flux."

"Rising mortgage payments, borrower defaults and loan buybacks from secondary mortgage market investors have led to numerous subprime lenders shutting their doors and has provoked congressional hearings on the topic of high default rates in that market," she explained.

"With these factors in mind, it is not surprising to see consumer lenders rank market volatility, including rising interest rates and compressed margins, as the No. 1 business driver in 2007," Britting said.

Declining home values in some marketplaces, in addition to and rising rates and leveling off of home prices in other regions quite simply makes it more challenging for consumer lenders to extend credit to borrowers, she described in "Future of Consumer Credit Part 1."

"In addition, lenders expect to be under greater regulatory scrutiny regarding predatory lending issues. Property assessing prospective borrowers' credit and collateral as well as the regulatory risks, and then offering the right product to the right consumer at the right time are paramount to the successful business strategy in coming years," Britting indicated.

In this atmosphere, Britting said lenders are placing a renewed importance on introducing new products and investing in technology.

The report found that lenders rank core systems transformation/upgrades and consolidations as their top three IT priorities for the year.

"The automatation theme continues as high priority as well, with 50 percent of respondents ranking automated workflow and adoption of business process management as the top IT priority for their institutions," Britting reported.

"Lenders noted the need for automation across numerous process flows to reduce application processing time and cost," she continued. "Worthy of note is that cumulatively, non-U.S. institutions ranked this as the No. 2 priority. A U.S.-only cumulative perspective would move advanced analytics and data management higher in the rankings."

Part of the reason for the need to invest in technology is all the mergers that have taken place since the Interstate Banking and Branching Efficiency Act went into place in 1994. Britting said lenders have "struggled with choosing between retiring existing legacy systems, migrating portfolios to a surviving system or installing new systems."

"Some institutions still live with multiple systems serving the same product but across different markets, which may be defined by geography or delivery channel," she noted. "The term ‘band-aid' has special meaning to FSI technology and operations teams living with manual processes and patching systems together to process a loan."

She went on to say that the term "connotes pain for product development teams looking to implement new products and features to garner shrinking market volumes or meet competitive threats. New technology exists that can make life simpler for the product staff seeking to build and implement new products, operations staff seeking to reduce processing costs, and IT teams seeking to reduce product cycle times."

Summarizing the current marketplace, Britting said, "FSI have significant challenges in front of them as they operate in a much less friendly consumer credit marketplace than earlier in the decade.

"Facing a second year of decreased growth, primarily due to the decrease in first mortgage refinancing but also stretched in other consumer lending segments by rising rates and increasing regulation," she explained.

"The most significant finding may be the type of IT projects the lenders are planning for 2007 through 2012," Britting highlighted. "Seventy-nine percent of survey respondents indicated core system transformations and upgrades will be underway at their institutions. These initiatives are clearly in support of the new products needed for lenders to be nimble enough to provide products consumers need and want in fluctuating economic times and the organic growth that institutions need and desire to maintain revenues."

Part 2

In TowerGroup's "Future of Consumer Credit Part 2," Britting discussed the timing of customer-focused collection initiatives.

"The credit crisis that started with subprime mortgages has not yet had as dramatic effect on mainstream consumer credit operations, but FSIs should not ignore the rising delinquency rates in other areas of consumer lending," she cautioned.

Apparently, some institutions have found success with the use of third-party collectors and self-service collection systems; however, Britting noted, "Customer preferences may represent an interesting possibility here and even the opportunity to turn a collections call into a sale."

In the same report she indicated part of the difficulty lenders have in streamlining core systems is cultural.

Britting said, "They have been talking about transformation for 30 years, but in many organizations, it hasn't happened yet, even though the technology is ready.

"One reason is cultural: Organizations need to support transformation from the top down. Transformation crosses many internal boundaries, including product silos and life stage of the customer," she explained.

Britting also said, "Finally, timing may be the answer to what is the best action or actions for any particular institution. Lower-cost projects that can be implemented within shorter time frames may be best suited for institutions needing to plan well-defined long-term strategy. Both financial services institutions and vendors can use the findings in this TowerGroup Research Note to establish their own growth plans and direction."

The studies questioned lenders throughout the U.S., Canada and the U.K. For more information, visit .

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