Pub. 12 2022-2023 Issue 3

Why Banks are Embracing Loan Marketplaces as a Solution to Liquidity

This story appears in the
Colorado Banker Magazine Pub 12 2022-2023 Issue 3

Consider a loan marketplace as you keep an eye on the developing landscape. It’s a new take on a traditional process, but with no fee to participate, there are virtually no downsides.

The pandemic created a unique confluence of events that affected the lending market. As recently explored by the Federal Reserve, bank deposit growth soared during the pandemic, with total deposits increasing more than double the pre-pandemic growth rate.

In addition, many banks took a more conservative approach to lending, concerned about the potentially negative impact of the pandemic on employment and businesses. And consumers’ declining credit quality, paired with the still approaching CECL transition, forced institutions to provide for greater losses.

Many of these trends have continued into 2022, leaving banks flush with liquidity. As lending remains a primary revenue driver, many institutions are revising their lending strategy to generate yield for investors. Such strategies include embracing digital lending systems, streamlining small business lending processes or navigating loan marketplaces for participation across the country.

How Does a Loan Marketplace Work?
A trusted loan marketplace connects bankers with access to loan participations and options to buy or sell whole loans or loan portfolios, creating a curated network of regional community financial institutions, third-party originators and investors across the U.S.

This technology can streamline existing procedures, help you optimally align with target relationship profiles and drive return from excess liquidity. Since there’s no cost to look at potential loan opportunities available and anonymity remains until you finalize a transaction, it’s perfect for any institution hoping to become:

  • Participants: Buyers can access key loan metrics and attributes of each deal upfront, including the seller’s underwriting process, to help you determine what’s right for your portfolio. Once a whole loan, participation or another opportunity of interest is identified, the buyer submits preliminary interest through the platform. The originator or selling party reviews the request, and once NDAs have been executed, the buyer or participant work together to finalize the transaction outside of the marketplace. Private personal information is not exchanged until this time, and this transaction costs 25bps, or 0.25% of the interest rate, to buy or sell.
  • Lead Lenders: Sellers can efficiently and anonymously post participation opportunities. Once the loan or loan portfolio is approved and posted live on the marketplace, prospective participants/buyers can search, view, favorite and/or submit offers on the opportunity or any other active deal(s) on the platform. Buyers can also set specific parameters, enabling the matching algorithm to automatically find and recommend new opportunities or capital partners that meet their unique transaction criteria, including asset type, size or geography.

Balance Your Portfolio and Credit Risk with a Loan Marketplace
These marketplaces enable you to become partners of a sort with other banks, establish preferred loan types and optimize quality and price by selecting from a diverse set of deal flows. This gives a big boost to financial institutions, especially smaller community banks, that would like to grow their lending network within – or beyond – their geographic market and enable opportunities across one or more banks.

Perhaps you’ve merged with another institution and need to minimize risk from existing credits you inherited. Maybe you have a strong borrower and want to keep doing business with them despite reaching your lending limit. In either case, you can post the loan and decide whether to retain the servicing rights.

Banks commonly struggle with a high concentration of certain asset categories that need to be offloaded. But you don’t have to rely on your immediate network. For example, a rural community bank with mostly Ag loans can easily connect with a metropolitan bank with a portfolio consisting of commercial real estate loans. In so doing, you can also make your institution less vulnerable to local economic slowdowns or sudden declines in loans of certain types.

Using Marketplace Lending to Streamline Procedures
This new technology simplifies the process of growing assets or disposing of them when lending limits or risk concentration becomes too high. Much like digital loan origination software, a modern loan marketplace decreases internal resource demands and enables you to manage the transaction process through a single point rather than across multiple parties.

You can also monitor your bank’s performance against peers using interactive visualizations of current call report information for all FDIC-regulated institutions. These analytics offer performance metrics, allocation, competitive analyses and actionable insight. Between more efficient procedures and market intelligence concerning how peers are transacting, this environment reduces the complexity of lending and deal origination.

Looking Ahead for the Lending Market
Consider a loan marketplace as you keep an eye on the developing landscape. It’s a new take on a traditional process, but with no fee to participate, there are virtually no downsides. Meanwhile, your institution stands to achieve higher returns, expand your loan access and easily diversify your loan portfolio.

Simon Fisher joined CSI in August 2020 to expand CSI’s digital lending strategy. Prior to joining CSI, Simon worked as a consultant helping banks around the U.S. conduct core evaluations. Simon has a fundamental understanding of industry trends by evaluating multiple platforms. During his career, he has worked in many different lending roles for a community bank for his 10-year term, including retail, commercial and mortgage loans. Simon understands the complexity of different loan types and is working to deliver the best digital experience for loan officers as well as borrowers.

Learn more about how the right enterprise core powers advancements like digital lending services in our Definitive Guide to a Modern Core Banking Partnership.