The Future of Private Lending
Institutional Investors & New Lending Models Are Reshaping the Industry
By Cory Nemoto
Private money as we know it today is not what it was less than a decade ago.
Within the past decade alone, the private lending space has evolved, changed, and gone through multiple cycles. In that time, private lending has shifted from being solely a niche endeavor; today, it stands as an institutionalized force, presenting fresh opportunities for smaller lenders to emerge and provide value to the market.
The shift towards institutionalization has been a pivotal turning point in the private lending space. Once considered a ‘mom and pop’ venture, the industry now assumes a professionalized approach that has attracted investors and borrowers alike. With this evolution, a range of innovative lending models, such as White Label and Correspondent Lending, has emerged, revolutionizing the way funds are channeled to borrowers.
Not too long ago, the very concept of White Label and Correspondent Lenders did not exist in the private lending industry. However, with the industry’s expansion and diversification, these terms have taken center stage and transformed the private lending landscape altogether.
White Label Lenders
White Label lenders are a relatively new type of private lender that has been gaining popularity in recent years. In its valiant pursuit to unify and advance the Private Lending industry, The National Private Lenders Association (NPLA) has created the Private Lending Glossary, which defines a White Label Lender as:
“A company that provides loan products or services under its own branding but relies on a third-party provider for underwriting, closing, funding, and servicing. This arrangement allows the white-label lender to offer a range of loan products without directly arranging warehouse financing or developing the infrastructure and expertise required to manage the entire lending process in-house. The third-party provider typically operates in the background, enabling the white-label lender to focus on marketing, customer acquisition, and building its brand.”
As the landscape of lending continues to evolve with the emergence of these innovative lenders, it becomes imperative to delve into the advantages and potential drawbacks associated with these lending models.
A few benefits of working with a White Label lender
» Relationship // Since White Label lenders typically work solely on the origination side of the lending process, they are able to focus on building the relationship directly with the borrower and map plans to help them grow and scale their business with the proper leveraging of private capital given their current financial situation.
» Flexibility // White Label lenders offer a variety of loan products, which can give borrowers more options to choose from.
» Expertise // Since White Label lenders typically work with multiple capital providers, they need to be very knowledgeable of many different credit boxes, guidelines, and closing processes. They need to be aware and adapt as each provider’s boxes and guidelines change with the market and current economic conditions.
White Label Lenders also work on the frontlines directly with borrowers, so they typically have real time knowledge and a good read on the industry as a whole, from both the lenders and borrower’s perspectives.
Potential drawbacks to working with a White Label lender
• Longer Closing Times // Since White Label lenders are held to third party processes, underwriting, and final approvals, it is not uncommon to see White Label lenders with slightly longer closing times.
• Higher Fees // White label lenders may charge higher fees than working with a Direct Lender.
• Limited Authority // White Label lenders do not have ultimate control or authority in whether or not a loan gets funded. Therefore, White Label lenders have no authority to make exceptions. If there are any exceptions needed on the loan, then the decision will ultimately be determined by the White Label lender’s capital provider.
Correspondent Lenders
Correspondent Lenders are another type of lender that have been around for many years and have made their way into the private lending industry. More commonly seen in the conventional lending space, these lenders originate and fund loans on behalf of a larger lender, such as a bank or mortgage company. The larger lender or investor then purchases the loans shortly after closing (NPLA Glossary).
The institutionalization of capital in the private lending industry has birthed a market for new Correspondent Lenders to form and now participate in originating non-owner occupied private loans against real estate.
Benefits of working with a Correspondent Lender
• Wider Range of Loan Products // Correspondent Lenders often have access to a wider range of loan products than direct or retail lenders. This can be helpful for borrowers who need different types of loan products from short-term fix and flip bridge loans to long-term DSCR loans.
• Flexible & Creative // Correspondent Lenders typically have multiple options for take-out partners, or investors and institutions to sell their loans to and recapitalize. They also have the option of holding the loan on their books. Therefore, Correspondent Lenders have some freedom to be flexible and creative with their lending products.
• Full Authority // Since Correspondent Lenders typically fund loans with their own capital, or their own access to capital, they have full authority to make exceptions and fund a loan.
Potential drawbacks to working with a Correspondent Lender
• Higher fees // Correspondent Lenders may charge higher fees than traditional lenders. This is because Correspondent Lenders have to cover the costs of originating and funding the loan, as well as the costs of selling the loan on the secondary market.
• Consistency // Since the Correspondent Lender (in a normal market) may intend to sell the loan to different take-out partners, their process and requirements of the borrower may differ and change on a deal-by-deal basis.
• Subject to capital market conditions // Correspondent Lenders take on more risk than White Label lenders and are tied very closely to the capital markets making their leverages, pricing, and ability to lend vulnerable to major economic events as we’ve seen in recent years with COVID-19 in 2020, and the interest rate hikes we are experiencing today.
The private lending space has been transformed in recent years and will likely continue to do so in the years to come. Institutional investors are now more involved and new lending models have emerged. These changes have made it easier for borrowers to get the financing they need.
The development of the private lending space has created new opportunities for borrowers and lenders alike. Borrowers now have access to a wider range of loan products and services, while new lenders can benefit from the expertise and resources of institutional capital providers.
White Label and Correspondent Lenders can be a valuable resource for borrowers, but it is important to be aware of the potential drawbacks before working with them. These lenders may charge higher fees and have longer closing times than direct or retail lenders. It is important to carefully compare your options and choose the lender that is the best fit for your needs.
The private lending landscape is now more dynamic and competitive than ever before, which is good news for both borrowers and lenders. Borrowers now have more options to choose from, and lenders have more opportunities to compete for business.
Over the next few years, as the private lending industry continues to grow, we expect new money to come into our space. More capital coming into the private lending space means more housing, more jobs, cleaner neighborhoods, and increased opportunities for both borrowers and lenders.
Also, please visit www.nplaonline.com
