Finance

Building the Future

• by John Ryan, NPLA
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The Digital Transformation of Construction & Renovation Finance By John Ryan A digital transformation is coming quickly to the construction and renovation lending industry. Two main catalysts have contributed to this emerging shift — the rapid advances in technology and an influx of private capital seeking to fill the void left by the regional bank system pullback. Business leaders and staff are using this period of higher interest rates to invest in operational efficiencies, data driven risk management, and the client experience to scale more safely and keep costs in check ahead of the next cycle. Even now with interest rates high, industry estimates of the full residential construction, renovation, and bridge lending wallet are around $450B annually. That number can be debated and broken down by business line, asset type, what’s addressable, lender type, etc. but in the end one thing is clear, there is considerable opportunity. In order to capitalize on this opportunity, lenders are embracing technology that will revolutionize the way construction funds are managed, from enhancing the precision of risk analysis to streamlining communication among stakeholders. By adopting digital platforms, the industry can move away from its reliance on outdated methods and shift toward a future where financial decisions are data-driven, timely, and more secure. The regional bank retreat was not merely a reaction to immediate financial pressures, it also reflected a broader reassessment of risk and return in the construction sector, historically viewed as high-risk by financial institutions. But now technology can help mitigate some of the age-old fears of construction lending and be a tool for the continued institutionalization of the industry. And private money lenders have been first movers to act and we are now seeing a tremendous influx of private capital into the housing construction and renovation sector where it is desperately needed. As a lender considers undergoing a digital transformation, it is critical for the key stakeholders to understand the industry landscape today, where it’s going, and how to get started on making a decision on which technology solution is right for them. The Current Technology Landscape Today, the industry is served by a host of Loan Operating Systems (LOS) which primarily focus on loan structuring. This includes the upfront ingestion of a loan, document management, and ongoing data exchange with servicers. A few long established, proficient vendors and a swath of homegrown systems serve the market needs. Borrower portals are either non-existent, embedded in the LOS platform, or again, homegrown technology with varying degrees of borrower adoption. Once a loan is approved, the bulk of construction and renovation loans are managed through a complex web of spreadsheets, emails, and text messages. These manual processes are opaque and hard to scale, posing significant operating challenges including a lack of efficiency and transparency often leading to delays, cost and staffing overruns, and the inability to capitalize on potential opportunities for innovation and growth. A traditional non-digital approach to construction fund-control also increases key-person risk and intuition or “gut feelings” rather than data-driven insights. While large-scale projects may benefit somewhat from structured processes like the G702 forms, smaller residential construction and renovation projects lack standardized procedures, leaving them vulnerable to inconsistencies and inaccuracies in budget monitoring and risk assessment. Tech-forward and well-capitalized lenders may build internal systems to manage the workflow with their clients. The results may serve the lender well, however it’s important to note lenders bear the upfront cost of development and ongoing opex related to technology ownership and staffing and therefore are spending time and resources for non-core competency business. Further, most home-grown workflows are internal staff focused and do not tackle the more challenging aspects of providing a well adopted self-service program for customers with high borrower satisfaction. Other lenders use older technology or captive software systems provided by inspection companies. However, actual decisioning and customer experience typically remain in offline spreadsheets where staff are still inputting draws on the behalf of borrowers. Lacking a true auditable transaction flow, over-disbursement errors can still occur. The broader construction and renovation lending ecosystem also involves numerous stakeholders, including lenders, note buyers, warehouse lenders, borrowers, contractors, and government entities, each with their own preferences and requirements. Aligning these diverse perspectives requires extensive communication and decision-making, potentially leading to inefficiencies and delays. Technology provides the architecture to streamline this system. Thankfully, private lenders and their capital partners are leading the charge in demanding innovative, off-the-shelf construction portfolio solutions and technologies to enhance risk controls, streamline lending processes, and leverage data for predictive analytics and reporting. Embracing a technological edge naturally improves the client experience, adding to the many reasons professional real estate investors and developers favor private lenders. What Does the Future of Construction Finance Look Like? The future is digital. At TrustPoint, we offer the construction and renovation lending industry a modern SaaS platform to streamline operations through our smart, purpose-built workflow. Our proprietary technology takes unstructured data and structures it to enable our innovative data-driven portfolio risk management and analytics. Our solution includes auditable fund control, integration with third party vendors, project health scoring, predictive insights into loan performance, cash forecasting visibility, and much more. The platform’s technology leverages the latest in artificial intelligence to analyze vast amounts of data in real-time, enabling lenders to assess the risk and viability of construction projects with unprecedented speed and accuracy. The integration of AI-powered decision engines into construction finance platforms represents a significant leap forward in how financing decisions are made. This exciting journey has only just begun. It is essential to evaluate your return on investment (ROI) when evaluating the cost of adding technology. TrustPoint’s returns come from improved scalability, auditability, and decision making with granular budget tracking, integrated inspection, approval, risk-scoring, and more. Lenders experience higher customer satisfaction (TrustPoint has an 86 NPS) and reduced support load with a highly utilized borrower portal (89% of borrowers self-service through our platform) and real time transparency into request status. They gain enhanced visibility and performance insights for leadership and investors with portfolio